How to Spot Tomorrow's Winners

Attractive valuations shrivel up during extended market rallies. As I was thumbing through a recent issue of The Value Line Investment Survey, I can say without a doubt that 2008 was a buying opportunity that we will be lucky to see again in the next decade.

Ever heard of Handy & Harman (HNH)? This manufacturer of engineered special industrial products has a $240 million market cap. Its shares were recently trading around $18. In 2008, the shares were changing hands for just over $1.

What about Buckeye Technologies (BKI)? This company makes specialty cellulose products that are used in an array of merchandise, from diapers to oil filters. The company has a market cap of $1.5 billion. The market offered it up at under $3 a share in 2009. This past April, Georgia-Pacific is giving shareholders $37.50 in its merger deal.

Lest you think I'm using hindsight to cherry-pick huge winners unknown to most, consider Whole Foods Market (WFM). Shares of this widely-known and well followed company were recently changing hands around $54. During the "Great Recession" shares were trading below $5. I balked, and it's been one my greatest mistakes of omission.

Odds are that four to five years from there will be many stocks trading for multiples of what they are today. Since there are no crystal balls in investing, the only option you have is to focus on the one thing that can be counted on: buying value and relying on reversion to the mean. Whether you are paying $0.50 for $1 or paying $0.90 for a $1 that is expected to compound over the years, time will ultimately work its magic.

But you have to pick names that offer such potential. How do you do that? Ultimately, you have to look at unusual occurrences. For example, consider Raven Industries (RAVN), which supplies specially engineered products to various markets, including agriculture, aerospace, and energy. For the past 10 years, Raven has been profitable and that profit has grown -- except for a dip in 2008. Add to that a return on equity (ROE) that has exceeded 20% in each of the past 10 years (as far back as I looked). On top of that, the company has generated this ROE without racking up a single dollar of debt capital. And equity has grown from $60 million to over $220 million over the past 10 years.

Put all of that together and you have a stock that, if bought and held over those past 10 years, would have yielded a return well in excess of 300%. Spotting a name such as Raven and others like it simply requires a constant willingness to search and seek out investment ideas. Then, when you see a dip in the price, you pounce.

Of course, not everyone has the time for this or is a professional investor, which is it's so helpful to peruse places like RealMoney. I do have the time, which is why I run a no-management-fee value-oriented investment fund. Gad Partners Fund is currently accepting (and open to) accredited investors. Happy searching.